The recent unrelenting rally is anything but normal! The fundamentals don’t support the scale of the rally. The S&P 500 earnings only grew 3% but the market rallied 30%+. The most overbought stock is Apple. The street analysts have been searching for all the reasons (service revenue, 5G, better iPhone 11 sales etc..) to justify the rally.
Naturally hedge funds wanted to give their money a run so the hedge fund shorts piled on Apple stock. As of 10/23/2020’s close, Apple stock is the most shorted stock in the entire market. Tesla was the most shorted before. 1% of Apple stocks are shorted with $14.3 billion and 20% of Tesla stocks are shorted with $13.7 billion. Because of the shorts in Apple stock, we have seen some intraday bearish reversal moves, each time it was bought back up by the bulls. So the bears are losing and the rally will continue to burn the shorts until something changes.
Right now the market is not running on fundamentals, rather it is running on easy money, sentiment and short covering, etc.. The highs made on Jan 17th are setting the stock market to line up with the business cycle turning point on Jan 18th. Since the market is closed on Jan 20th, how the individual index behaves in the next or two trading day will determine which market is perfectly lined up with the turn of the business cycle. The DOW represents the international money flow and the NASDAQ is more representative of the domestic activities.
If the DOW starts to trade lower on Jan 21st, it could make Jan 17th a daily cycle high. If indeed we get a daily cycle high on Jan 17th, that means the DOW index is in perfect alignment with the turn. The NASDAQ directional change could be extended into February.
29460-29707 is the DOW resistance to watch closely. The street is expecting the DOW to hit 30,000, for some reason people are attracted to whole numbers in the stock market. If the DOW stops just shy of 30,000, that would be a nice market target for a temporary high. A daily closing below 28,789 could be the confirmation of the temporary high.
In order for this high to be a major high, the DOW has to hit 32,000 before the correction, which is not likely based on timing models. Therefore we are looking at this high as a pause of the secular bull market that started in 2009.
Below is the S&P 500 daily chart, breaking out the top of the channel is a sell signal. So watch the lines. We will be sending out notes during the week if anything develops significantly.
